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What are stock fundamentals? Tips for evaluating your portfolio

It could seem simple to just take your money and invest it somewhere. However, it is not easy to become a successful investor. Non-professional investors, or “retail investors,” have a high annual loss rate.

There are many possible explanations, but one that resonates with all non-investment professionals is the inability to devote sufficient time and resources to researching a big number of stocks.

Stock fundamentals refer to the basic financial and economic data that are used to analyze and evaluate a company’s stock.

These fundamentals include a company’s revenue, earnings, assets, liabilities, cash flow, and other financial metrics. Analysts and investors use these fundamentals to assess a company’s financial health, growth potential, and overall value.

Some of the key fundamental ratios used to evaluate stocks include price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, price-to-book (P/B) ratio, and dividend yield. These ratios help investors determine whether a stock is overvalued or undervalued and whether it is a good investment opportunity.

In addition to financial metrics, stock fundamentals can also include non-financial factors such as a company’s management team, brand reputation, and market share. Overall, stock fundamentals are an essential component of stock analysis and are used to make informed investment decisions.

The lesson here is that if you don’t do your homework, you’ll wind up losing a lot of money. The good news is that by focusing on a few crucial aspects of investing, you may reduce both your losses and the time spent on research. Below, we will discuss the five cornerstones of successful investing.

In this article, we will talk about the essentials of investing, how to analyze and evaluate your portfolio, and how you can optimize your investments to meet your financial goals.

If you want to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or use WhatsApp (+44-7393-450-837).

What are stock fundamentals?

Before buying a stock, investors should educate themselves thoroughly about the company’s business model.

What exactly do they produce? What exactly do they provide for customers? Where exactly do their operations take place? What is their best-selling item, and how is it doing for business? Is their company well recognized as an industry pioneer?

Consider this to be a first meeting. You wouldn’t take someone on a date if you didn’t know anything about them. You’re just asking for trouble if you do that.

You may easily get this data online. Check out the business by typing their name into your preferred search engine. Then, inform a close relative about your planned investment. They will know you know enough if you can answer all of their queries.

Ratio of Price to Earnings (P/E)

Let’s pretend for a second that you’re looking for a financial advisor. Two different financial advisors are interviewed. One has a strong tradition of helping people amass substantial wealth.

You have looked for any reason not to trust this financial advisor with your money, yet your friends have reported good returns from working with them. They tell you that out of every dollar they make for you, they’ll keep forty cents and hand you the remaining sixty.

The second financial planner is just starting out. Although they show some signs of promise, their track record is limited and they lack significant experience.

Investing with this financial advisor has the benefit of being more cost-effective. They are just interested in keeping 20% of your earnings. But what if they can’t generate as much income as your current financial advisor has?

The P/E ratio is determined by comparing the share price to the company’s earnings per share.

These ratios compare the current stock price to the earnings per share of a company. Analysts and investors can gauge the firm’s value by comparing it to that of other, comparable businesses.

Investors are willing to pay $20 for every $1 in earnings if the P/E ratio for a given company is 20. The cost could be justified if the business is expanding rapidly.

The price-earnings ratio (P/E) is calculated by dividing the stock’s current market price by the sum of its earnings over the past four quarters.

Think about how this figure stacks up against that of other businesses in a comparable industry. There better be a good reason for your company to have a greater P/E than its competitors. Investments with a lower P/E but rapid growth should be closely monitored.


Despite appearances, beta is actually quite simple. It calculates how erratic your stock price has been over the past five years, often known as volatility.

In essence, it is a gauge of the systemic risk associated with a stock relative to the market as a whole. When researching stocks on Yahoo or Google, you’ll typically discover the beta value alongside the P/E ratio.

The S&P 500 index represents mental rock-solidness. Your company has a greater beta if its five-year price movement is more extreme than that of the index.

Any value of beta more than one indicates a higher level of risk, whereas any value of beta less than one indicates a lower level of risk.

Beta provides some insight into price risk, but how predictive is it of more systemic dangers? High beta stocks may both bring in huge profits and wipe you out in an instant, so keeping a tight eye on them is essential.

When compared to the S&P 500, stocks with a lower beta tend to be less volatile. You can feel considerably more secure about investing in this “defensive stock.” You won’t make as much in a hurry, but you also won’t have to keep an eye on it constantly.


Look for dividends if you don’t have time to monitor the market every day but still want your assets to generate income for you.

If the stock price goes up or down, you will still receive your dividend payment. A dividend is a payout made from a company’s earnings to its shareholders.

Dividends are often distributed in the form of cash, while it is not unheard of for some corporations to distribute dividends in the form of stock shares, the amount of which is determined by the board of directors.

Stock fundamentals include a company's revenue, earnings, assets, liabilities, cash flow, and other financial metrics.
Stock fundamentals include a company’s revenue, earnings, assets, liabilities, cash flow, and other financial metrics.

For many shareholders, dividends are crucial because they provide a regular return on their investment. They are typically released on a quarterly basis by most companies.

Many long-term investors choose investing in dividend-paying corporations. In times of economic instability, they can give investors peace of mind.

Large corporations with stable earnings are in a better position to pay out generous dividends. Companies in the oil and gas, banking and finance, basic commodities, healthcare and pharmaceutical, and utility industries are among the most well-known in the world.

It is not unusual for premium stocks to pay dividends of 6% or more. Startups and other early-stage businesses may not be profitable enough to pay dividends just yet.

Check the dividend yield of the company before investing in its stock. Invest in dividend-paying companies if you want a safe place for your money in the market.

Stock charts

There is a wide variety of stock charts available. Fundamental and technical analysts alike make use of several types of charts, such as line charts, bar charts, and candlestick charts.

However, it’s not always simple to interpret these graphs. As a matter of fact, it often is. It takes a long time to learn how to interpret them properly.

Now, as a retail investor, what does this mean to you? This is not a stage you can afford to skip. This is due to the fact that even reading simple charts requires little training.

It’s a good sign if the graph of a certain investment extends from left to right. If the graph is going down, you should probably avoid it and not bother trying to figure out why.

You can choose one of the thousands of stocks available without worrying about making a bad investment. If you think this stock has potential, you should add it to a watch list and check back on it later.

Many people are willing to put their money into stocks with terrifying charts, but they have access to information and tools that you probably don’t.

Extensive investigation can replace anything. However, investing for the long term, benefiting from dividends, and selecting stocks with a track record of success are all excellent ways to safeguard your wealth. Avoid or at least limit the use of hazardous and aggressive trading tactics unless you have a lot of spare time.

How do you use stock fundamentals to analyze your investments?

Financial statements and ratio calculations help investors get a sense of a company’s health so they may assign a value to it.

Performing a financial study of a firm is not as daunting as it may appear. Program evaluation review techniques (PERTs) are commonplace in project management because of the visual timelines they provide.

When applying for a loan from a financial institution, borrowers must detail not just their assets but also their major debts. The quality of your assets, such as your car and house, will be considered by the bank when it assigns a conservative value to them in order to determine your financial standing.

The bank also verifies the accuracy and completeness of all reported liabilities, including mortgage and credit card balances. You have a positive net worth, or equity, if the value of your assets is greater than the value of your obligations.

Similar considerations apply when assessing the financial health of a publicly traded company, with the added caveat that investors must also take into account the stock price. Let’s check it out.

Financial statements and balance sheet

The assets and debts of a business are the primary components in determining its financial health, just as they are in yours. Equity held by stockholders is another indicator of a company’s health. The balance sheet provides stockholders with this data.

Assume we are analyzing a made-up publicly traded retail company, by looking at its financial statements.

We do this by reading the company’s annual report, which is often available for free online. The assets section comes first on a balance sheet, then liabilities, and finally equity owned by shareholders.

Current assets and liabilities are separated from noncurrent ones on the balance sheet. Assets and debts with a maturity of less than a year are called “current.”

For instance, let’s assume that the stocks reported by the company on December 31, 2018, will be sold within the next year, at which point the quantity of stocks will decrease and the quantity of cash will increase.

The company’s inventory, like that of most merchants, constitutes a sizeable component of its current assets and must be thoroughly analyzed.

Analysts and investors use stock fundamentals to assess a company's financial health, growth potential, and overall value.
Analysts and investors use stock fundamentals to assess a company’s financial health, growth potential, and overall value.

Companies strive to either maximize sales for a fixed inventory amount or minimize stock value for a given level of sales since inventory represents a genuine investment of scarce capital.

If our fictional company’s sales increase by 23% while the value of their inventory drops by 20%, it indicates good inventory management on their part. The company’s operating cash flow benefits from this decrease.

Existing (or accrued) commitments to suppliers, employees, the IRS, and providers of short-term financing all fall under the category of current liabilities, which are due to be paid during the next fiscal year. In order to pay these bills when they are due, businesses must carefully manage their cash flow.

The current ratio, defined as total current assets minus total current liabilities, is a popular metric used by financial analysts to evaluate a company’s liquidity.

The current ratio should neither be so low as to signal imminent insolvency, nor should it be so high as to imply a needless accumulation of cash, receivables, or inventory. The current ratio of a corporation should be analyzed in the context of its historical performance, just as with any other ratio.

Assets and debts whose useful life are more than a year away are considered non-current. The property, plant, and equipment necessary to conduct our company’s operation would make up the bulk of the its non-current assets.

Obligations under property, plant, and equipment leasing arrangements, in addition to other borrowings, could constitute long-term liabilities.

Book Value as a financial standpoint

Shareholder equity is calculated by deducting total liabilities from total assets. This is the accounting value of the shareholders’ equity in the company.

It consists mostly of the initial investment made by shareholders and the percentage of earnings that have been held by the business rather than distributed to shareholders as a dividend.

Investors can get a sense of whether a stock is fairly valued or overpriced by comparing its market price to the company’s book value.

Even with its limitations, the market-to-book multiple continues to serve as a vital resource for value investors.

Companies with a low market-to-book stock price ratio tend to do better than those with a high multiple, according to a large body of academic research. This makes perfect sense, as a low market-to-book multiple indicates a solid financial position for the company at the current price.

High and low market-to-book ratios are relative terms that require comparisons to be established.

Book-to-market multiples of publicly traded shops can shed light on whether or not our fictional company’s multiple is high.

To sum up, the financial health of a firm is indicative of its overall health to investors. In order to correctly understand and value a firm, every investor should conduct a financial analysis of the company’s financial statements, as well as the footnotes in the annual report.

What is technical analysis?

Technical analysis is a method used in the financial markets to analyze price and volume data in order to make investment decisions and spot trading opportunities.

Technical analysis, in contrast to fundamental analysis, does not consider such factors as sales or earnings when determining a security’s worth.

With the help of technical analysis tools, investors can analyze the impact of supply and demand on a security’s price, volume, and implied volatility.

It is based on the idea that a security’s volume and price fluctuations in the past are useful clues to how that asset is likely to perform in the future when used in conjunction with rules for investing or trading.

In addition to improving the assessment of a security’s strength or weakness in relation to the larger market or one of its sectors, it is commonly used to produce short-term trading signals from a variety of charting tools. Analysts might use this data to refine their value of the company.

Charles Dow and the Dow Theory pioneered modern technical analysis in the late 1800s.

In addition to William P. Hamilton, Robert Rhea, Edson Gould, and John Magee, several more prominent researchers contributed to the foundational ideas of Dow Theory. Over the course of its history, technical analysis has expanded to incorporate hundreds of patterns and signals.

Expert analysts frequently combine technical analysis with other types of investigation. Stock price charts and related data may be all that some retail traders need to make a decision, but professional equity analysts almost never rely entirely on such data.

Any investment that has access to trading history can be analyzed using technical analysis. Stocks, futures, commodities, fixed-income instruments, currencies, and other securities fall under this category.

In reality, traders who deal in commodities and foreign exchange are much more likely to use technical analysis because of their focus on short-term price fluctuations.

Stocks, bonds, futures contracts, and currency pairs are all examples of trading instruments that are subject to supply and demand, which technical analysis attempts to predict.

Some people even think that technical analysis is nothing more than analyzing how supply and demand affect the market price of a securities.

Although price movements are the most popular data to analyze using technical analysis, other metrics, such as trading volume and open interest, are also monitored by certain analysts.

Technical analysis indicators

Researchers in the field of technical analysis have generated hundreds of patterns and signals to aid in trading. Numerous trading techniques have been created by technical analysts to aid in the prediction and trading of price fluctuations.

Indicators can be broken down into two broad categories: those that seek to identify the current market trend (including support and resistance regions) and those that seek to assess the strength of a trend and the likelihood that it will continue.

Trendlines, channels, moving averages, and momentum indicators are all widely used technical indicators and chart patterns.

Technical analysts typically examine the following categories of data:

  • Changes in Costs
  • Chart patterns
  • Indicators of volume and momentum
  • Oscillators
  • Moving averages
  • Resistance and support levels
  • Premises used in Technical Analysis

Fundamental analysis and technical analysis are the two main approaches used to evaluate stocks and determine the best course of action for an investment.

Contrast this with technical analysis, which relies on statistical analysis of price fluctuations on the assumption that the price of a security already reflects all publicly accessible information rather than on the study of financial statements.

Rather than evaluating the fundamental characteristics of a security, technical analysis looks for patterns and trends in order to infer market sentiment.

Charles Dow published an editorial series delving into the principles of technical analysis. The foundation of technical analysis trading can be traced back to two of his central ideas, which he laid out in his publications.

The market is efficient because prices accurately reflect all relevant information, but

Even seemingly unpredictable price shifts in the market follow predictable trends and patterns that tend to recur.

Dow’s contributions are still used in modern technical analysis. Analysts in the field generally agree on three presumptions:

The fundamentals of a company, macroeconomic considerations, and investor sentiment are all discounted by the market, according to technical experts.

The Efficient Markets Hypothesis (EMH), which draws the same result about pricing, is consistent with this perspective. The next step is a study of price changes, which technical analysts interpret as the result of buying and selling pressure on a stock.

Technical analysts believe that prices, even in seemingly random market fluctuations, can be observed to demonstrate trends over various time frames. In other words, stock prices tend to stick to established patterns rather than making wild swings.

This premise is the cornerstone of most technical trading systems.

Technical analysts hold the view that the past is a good predictor of the future. Market psychology, which is based on emotions like fear and enthusiasm, is sometimes blamed for the predictability of price fluctuations.

To make sense of market trends, technical analysts study chart patterns to deduce the causes and effects of investor sentiment and subsequent price action.

Despite the fact that many forms of technical analysis have been in use for well over a century, they are still seen to be important because of the patterns they depict in price fluctuations.

What is the difference between technical and fundamental analysis?

The two main schools of thought when it comes to trading are fundamental analysis and technical analysis, which couldn’t be more different from one another.

As with any investment technique or philosophy, proponents and detractors can be found for both approaches when trying to study and predict future patterns in stock prices.

In order to determine whether or not a stock is a good investment, fundamental analysis is used. Economic and industry trends, as well as company finances and management, are all areas of focus for fundamental analysts.

Earnings, costs, assets, and liabilities are all crucial metrics for fundamental analysts to consider.

The stock’s price and volume are the only two inputs in technical analysis, in contrast to the many other factors considered in fundamental research.

The fundamental premise is that there is no need to pay close attention to fundamentals because they are already reflected in the price. Instead of trying to determine the true worth of a stock, technical analysts look at historical data and market trends to predict how a stock might perform in the future.

There are analysts and academic researchers who believe that the EMH proves that historical price and volume data do not contain any information that can be used to make decisions.

Nevertheless, by the same rationale, business fundamentals should not supply any information that can be used to make decisions. The semi-strong and weak versions of the EMH respectively represent these positions.

Learning fundamental and technical analysis can be a valuable skill for investors as it allows them to evaluate stocks and make informed investment decisions.
Learning fundamental and technical analysis can be a valuable skill for investors as it allows them to evaluate stocks and make informed investment decisions, but it does take significant time and effort.

One such argument against technical analysis is that it’s useless to pay attention to price patterns because the past never repeats itself. It appears that a random walk assumption works best for modeling prices.

A third argument against technical analysis is that when it does work, it does so because it proves to be true. Stop-loss orders are common among technical traders, and many of them set them below a stock’s 200-day moving average.

If many market participants have done this and the stock reaches this price, it will likely be met by a flood of sell orders, sending the price of the stock lower.

Other traders will observe the price drop and follow suit, further strengthening the trend. Self-fulfilling in the short run, this selling pressure won’t have much of an impact on the asset’s price in the next weeks or months.

Ultimately, the price can be moved in the direction predicted by a large number of traders following the same signal, but this small group of traders cannot control the market in the long run.

Technical analysts in the field generally agree on three fundamental tenets. The first is that, like in the efficient market hypothesis, everything is discounted by the market.

Second, they believe that prices will always show trends, even in seemingly chaotic market moves.

Finally, they think that repeating past mistakes is likely. Market psychology, which is based on emotions like fear and enthusiasm, is sometimes blamed for the predictability of price fluctuations.

In order to determine whether or not a stock is a good investment, fundamental analysis is used.

Technical analysis, on the other hand, bases its predictions on the idea that all relevant fundamentals have already been priced in.

Technical analysts look at stock charts in an effort to discern patterns and trends that may foretell the future performance of a security rather than trying to calculate its intrinsic value.

Technical analysis can be learned through a number of different channels. Learning the fundamentals of investing, stock markets, and financials is the first order of business.

Books, courses, internet resources, and classroom instruction can all help with this. When you’ve mastered the fundamentals, you can move on to more advanced readings that narrow in on technical analysis. The technical analysis course on Investopedia is one possibility.

Should you learn fundamental and technical analysis?

Learning fundamental and technical analysis can be a valuable skill for investors as it allows them to evaluate stocks and make informed investment decisions.

However, it requires a significant amount of time, effort, and research to master these skills. If you are willing to invest the time and effort to learn these skills, it can be a cost-effective way to manage your own investments.

On the other hand, hiring a professional financial advisor can be a good option if you do not have the time or expertise to manage your own investments.

Financial advisors have the knowledge and experience to help you select stocks, build a diversified portfolio, and manage risk. However, this option can be more expensive as financial advisors typically charge fees for their services.

Ultimately, the decision to learn fundamental and technical analysis or hire a professional financial advisor depends on your personal circumstances and investment goals. It is important to carefully consider your options and choose the approach that best fits your needs and preferences.

Whether to learn fundamental and technical analysis or hire a professional financial advisor to handle stock investments depends on your personal preferences, experience, and resources.

Pained by financial indecision? Want to invest with Adam?

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Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.



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